Trusts in Switzerland and U.S. reporting rules

The published framework for trustees

FINMA describes a licensing framework for trustees that conduct their activities commercially in Switzerland. Its explanation defines trustees through their management or holding of a separate fund under a trust instrument. The fund serves beneficiaries or a specified purpose set out in the trust instrument.^[1]

FINMA distinguishes trustee activity from financial services covered by the Financial Services Act, abbreviated FinSA. Trustee activity itself falls outside that Act's scope, while financial services offered by a trustee can attract its requirements. A trustee that also conducts portfolio management requires a separate FINMA licence for that activity.^[1]

Trust arrangements and the trustee's role

FINMA's definition covers funds held for beneficiaries and funds administered for a specified purpose. The trustee's role includes maintaining the separate fund's value and applying it to its designated purposes.

A trustee can also undertake investment advice or portfolio analysis alongside its fund management responsibilities. FINMA identifies providing financial instruments as another possible activity, with FinSA requirements applying when financial services are offered.^[1]

Licensing and commercial registration

FINMA licenses commercial trustees, and applicants also need affiliation with a supervisory organisation. A licence is required before commercial activities begin, subject to the transitional provisions described by FINMA. The application process uses FINMA's survey and application platform, identified by the abbreviation EHP.^[1]

Applicants need an eligible legal form and a corresponding entry in the commercial register. FINMA permits a sole proprietorship or commercial enterprise, and it also permits a cooperative. Organisational requirements include adequate risk management and internal controls, together with sufficient equity capital or securities.^[1]

The application documents also describe the trustee's operations and the geographic area of its business. Supervisory affiliation requires evidence confirming that a supervisory organisation supervises the applicant. These requirements apply alongside the financial and organisational conditions for receiving a FINMA licence.^[1]

The commercial-activity tests include gross annual earnings above CHF 50,000 or trust funds exceeding CHF 5 million. The fund-value test applies at any point in time. Another test covers establishing more than 20 contractual relationships a year (leaving out one-off relationships), or maintaining at least 20 such relationships.^[1]

Certain legally exempt activities are excluded when assessing whether a trustee's business meets the commercial tests. FINMA gives exclusive management of family-related persons' assets as an example of such an activity. A licensed trustee ending its operations requires FINMA's prior approval, with the supervisory organisation asked for its opinion.^[1]

Trust reporting in revenue authority guidance

The Federal Tax Administration's Qualification Committee addresses a trust loan within the financial-account reporting framework. Its example concerns a trust classified as a financial institution and a settlor resident in a reportable jurisdiction. The example also specifies a loan contract between the trust and the settlor, made outside the settlor's role as settlor.^[2]

For that arrangement, the committee answers affirmatively that the loan represents a debt interest and therefore a financial account. Its answer assigns loan repayments to disposal or redemption proceeds, or to the category for other income. The corresponding reporting codes are CRS503 and CRS504.^[2]

Automatic exchange and FATCA

Switzerland's automatic exchange framework collects financial information where covered institutions' clients have tax residence abroad. The FTA describes reporting by certain banks and collective investment vehicles, with insurance companies also within the framework. Reported financial information includes investment income and account balances.^[3]

Institutions transmit the information to the FTA through ePortal, and the FTA forwards it to foreign tax authorities. The State Secretariat for International Finance handles coordination and strategic management in international financial and tax matters. That body also publishes the list of Switzerland's AEOI partner states.^[3]

Treasury's Switzerland entry records Model 2 as in force and Model 1 as signed. Its agreement listing identifies Model 2 for Switzerland. Treasury explains that FATCA requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers. The reporting description also covers accounts held by foreign entities in which U.S. taxpayers have substantial ownership interests.^[6]

U.S. tax classification and reporting

U.S. citizens fall within the IRS definition of U.S. persons for foreign trust reporting. The IRS describes income tax consequences and information reporting obligations for U.S. persons connected with foreign trusts. Those obligations can arise through ownership or transactions, including the receipt of distributions.^[8]

The IRS domestic-trust definition requires U.S. judicial supervision and U.S. persons' control over all substantial trust decisions. A trust outside that definition is foreign for these purposes. Under the grantor trust rules, ownership treatment can apply to all or part of a trust's assets.^[9]

A U.S. person treated as a foreign trust's owner generally pays tax on the trust's income. Section 679 specifically addresses U.S. transfers to foreign trusts with a U.S. beneficiary or a presumed U.S. beneficiary. A beneficiary receiving a foreign nongrantor trust distribution generally reports the applicable share of distributable net income.^[8]

Form 3520, Part I reports a U.S. person's transfers to a foreign trust and information about qualified obligations received from the trust. Distribution reporting can also cover loans received from the trust and uncompensated use of its property. A U.S. owner reports ownership under the grantor trust rules, subject to the applicable filing exceptions.^[8]

Part II ownership reporting applies even when the trust has no transactions during the reporting period. Distribution reporting in Part III includes amounts received directly or indirectly, whether or not those amounts are taxable. The instructions also treat certain constructive transfers as distributions, including payments of a recipient's credit card charges.^[9]

U.S. owners are responsible for ensuring that the foreign trust files a complete and accurate Form 3520-A. The trust also furnishes annual statements to its U.S. owners and beneficiaries. When the trust fails to file, the U.S. owner attaches a substitute Form 3520-A to a timely Form 3520.^[8]

Form 8938 can apply when specified foreign financial assets exceed the relevant aggregate reporting thresholds. FBAR reporting can apply where a person has a financial interest in a foreign financial account or signature authority.

Certain qualifying foreign retirement or nonretirement savings trusts have reporting exceptions under Rev. Proc. 2020-17. Eligibility depends on the individual's status and the trust meeting the procedure's conditions. The IRS states that foreign trust filing exceptions do not remove other reporting obligations, including applicable Form 8938 and FBAR reporting.^[8][9]

Trust governing law

Switzerland has no domestic trust law.^[10]

Foreign governing laws used for trusts administered from Switzerland include those of Jersey, the Cayman Islands, the British Virgin Islands and Singapore.^[10]

Trustees based in Switzerland may administer trusts governed by foreign laws.

More on Switzerland

Questions and answers

Related resources

Related glossary terms

• Trust: The Hague Convention describes a trust as a relationship in which a settlor places assets under a trustee's control for beneficiaries or a specified purpose.
• Common Reporting Standard: The Common Reporting Standard sets rules for exchanging financial account information, covering reporting institutions, covered accounts and due diligence.
• Intergovernmental agreement: An intergovernmental agreement appears in FATCA rules for foreign financial institutions. Form 8938 instructions also use the term for certain foreign accounts.

Related articles and guides

• Malta reporting frameworks and U.S. trust forms: Malta's rules on financial account information exchange and trust registration, with the IRS reporting framework for U.S. citizens with foreign trusts.
• Hong Kong information exchange and U.S. trust reporting: Hong Kong's framework for exchanging financial account information and its FATCA agreement status, with the IRS reporting rules for foreign trust owners.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.